The Problem with Patents

By: Adam Gautsch, OrangeCoat.com

The question was asked, “How are you going to defend your business against copycats? You can't patent this idea. VC's want a patentable business.”

My answer was, “our goal is to build a strong community and reseller network. Those two things, are more important than a truck load of patents”

I understand that everyone does not agree with this statement and this is not to say I don't see the value of a patent in certain situations and businesses. However, for many business ideas and concepts the patent has become a crutch and killer of innovation. Especially (but not exclusively) for online business the patent is a useless tool. The patent has been replaced by a strong and loyal community and customer base. Creating better business practices and offering a better product are more important than patenting every idea you have. Let's take two recent news stories as examples of how helpful patents are for online business.

Example 1: Your community of contributors and customers are more important than your patent list

Netscape versus Digg, Newsvine, et. al.

Over the last two years there has been a large growth in the number and popularity of social bookmarking sites. Social bookmarking allows a community of members to submit interesting links (articles, videos, photos, news, etc). The same community then plays the role of editor through a variety of voting mechanisms that allow the more popular links to rise to the top of the site.

Thankfully, no one bothered to patent this idea (that I know of) and so there are plenty of sites gathering an audience and loyal community members (the people that actually submit the news). Most of the sites were created by individuals or startups, and some were well funded, while others were not funded at all. But all offer different and interesting approaches to the same general concept.

Things became interesting recently when Netscape (part of AOL Time Warner) decided to get in on this game. Step one for Netscape was to copy the design and function of the most popular of these bookmarking sites: Digg.

Digg basically laughed off the launch of Netscape's “Digg-killer.” I'm sure there was some hand-wringing, but Digg understood the important part of the site was not the technology or the concept or anything else they could patent. The important thing to Digg was the community. The community of people that submit articles and stories on a daily (sometimes hourly) basis are more powerful and valuable than 1,000 patents.

Soon after the release of the new Diggified Netscape, Netscape realized this too. So, they took an interesting step and offered $1,000 a month to many of the top contributors from their competition. This is when the fur flew. When Netscape copied the design and concept of Digg.com there were some sarcastic remarks but little more. However, when Netscape tried to take community members, well that was important.

This fight for users has just begun. Whatever the outcome, it seems clear that both the users and communities of these sites are going to be the winner. No doubt all sites that want to compete are going to have to up their respective games. And if community contributors can make money, all the better. Since there is no patent on the idea of social bookmarking the best sites can be decided through a free market approach and that is something that is very good for everyone.

Example 2: Can't beat 'em, sue 'em

The Problem with Friendster.

When people ask why I think patents hurt business innovation the case of Friendster is going to be my new go-to example.

In the of world social networking (not social bookamarking--there's a differnece) sites like MySpace and Facebook have been kicking Friendster's butt. Whatever the reason(s), the market decided that Friendster wasn't as good and consequently, their page views have dropped below one million a month. However, Friendster's hail mary pass was caught a couple of weeks ago when they were awarded a patent on “social networking.” Read that sentence again and tell me it is not ridiculous. How can anyone honestly patent social networking? Or as Evan put it, “next thing you know someone is going to patent the handshake.”

I do not know if Friendster can honestly defend this patent or not. However, if Friendster does somehow stay around because of this patent or, in a more extreme case, if Friendster can overtake MySpace because of this patent, it will be a sad day for capitalism. The market spoke, Friendster lost, and should not be saved by the courts.

I look at patents through the spectrum of web business. It is what I do every day and it is what I know. In almost every example for the web, patents are bad for the market. They help to stifle competition and thereby growth, change and innovation. They allow for inferior businesses and products to gain an edge because of the legal system. How is that good capitalism?

Once again, this is not to say that patents are never a good idea. There are many discrete fields that need patents to defend from unscrupulous idea theft. We need ways to ensure people who create something unique and marketable are rewarded. However, it seems clear that the current patent system in America is at least partially broken. Changes on how and/or what is awarded a patent clearly needs to happen.

See 3 other posts submitted by Adam Gautsch. Find articles, people, and videos related to: Economics, Entrepreneurial, Featured Articles, Innovation, Internet, Opinion, Venture Capital